Deck 17: Oligopoly

Question 1

If duopolists individually pursue their own self-interest when deciding how much to produce,the amount they will produce collectively will

A)be less than the monopoly quantity.
B)be equal to the monopoly quantity.
C)be greater than the monopoly quantity.
D)Any of the above are possible.

Answer 1

C

Question 2

Game theory is important for the understanding of

A)competitive markets.
B)monopolies.
C)oligopolies.
D)all market structures.

Answer 2

C

Question 3

When price is above marginal cost,selling one more unit at the current price will increase profit.This concept is known as the

A)income effect.
B)price effect.
C)output effect.
D)cartel effect.

Answer 3

C

Question 4

Assuming that oligopolists do not have the opportunity to collude,once they have reached the Nash equilibrium,it

A)is always in their best interest to supply more to the market.
B)is always in their best interest to supply less to the market.
C)is always in their best interest to leave their quantities supplied unchanged.
D)may be in their best interest to do any of the above,depending on market conditions.

Question 5

In studying oligopolistic markets,economists assume that

A)there is no conflict or tension between cooperation and self-interest.
B)it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome.
C)each oligopolist cares only about its own profit.
D)strategic decisions do not play a role in such markets.

Question 6

A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called

A)a competitive equilibrium.
B)an open-market solution.
C)a socially-optimal solution.
D)a Nash equilibrium.

Question 7

Scenario 17-1.Assume that the countries of Irun and Urun are the only two producers of crude oil.Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits.In the world market for oil,the demand curve is downward sloping.
Refer to Scenario 17-1.As long as the combined level of output is less than the Nash equilibrium level,both Irun and Urun have the individual incentive to

A)hold production constant.
B)decrease production.
C)increase production.
D)increase price.

Question 8

If a certain market were a monopoly,then the monopolist would maximize its profit by producing 1,000 units of output.If,instead,that market were a duopoly,then which of the following outcomes would be most likely if the duopolists successfully collude?

A)Each duopolist produces 1,000 units of output.
B)Each duopolist produces 600 units of output.
C)One duopolist produces 400 units of output and the other produces 600 units of output.
D)One duopolist produces 800 units of output and the other produces 400 units of output.

Question 9

An oligopolist will increase production if the output effect is

A)less than the price effect.
B)equal to the price effect.
C)greater than the price effect.
D)The oligopolist never has an incentive to increase production.

Question 10

The theory of oligopoly provides another reason that free trade can benefit all countries because

A)increased competition leads to larger deadweight losses.
B)As the number of firms within a given market increases,the price of the good decreases.
C)As the number of firms within a given market increases,the profit of each firm increases.
D)All of the above are correct.

Question 11

Table 17-9 $$\begin{array} { | r | r | r | } \hline \text { Price } & \text { Quantity } & \begin{array} { c } \text { Total } \\\text { Revenues }\end{array} \\\hline 70 & 0 & 0 \\\hline 65 & 100 & 6500 \\\hline 60 & 200 & 12000 \\\hline 55 & 300 & 16500 \\\hline 50 & 400 & 20000 \\\hline 45 & 500 & 22500 \\\hline 40 & 600 & 24000 \\\hline 35 & 700 & 24500 \\\hline 30 & 800 & 24000 \\\hline 25 & 900 & 22500 \\\hline 20 & 1000 & 20000 \\\hline 15 & 1100 & 16500 \\\hline 10 & 1200 & 12000 \\\hline 5 & 1300 & 6500 \\\hline 0 & 1400 & 0 \\\hline\end{array}$$

-Refer to Table 17-9.If this market were perfectly competitive instead of oligopolistic,what quantity would be produced?

A)1400
B)1300
C)1200
D)1100

Question 12

A special kind of imperfectly competitive market that has only two firms is called

A)a two-tier competitive structure.
B)an incidental monopoly.
C)a doublet.
D)a duopoly.

Question 13

For cartels,as the number of firms (members of the cartel)increases,

A)the monopoly outcome becomes more likely.
B)the magnitude of the price effect decreases.
C)the more concerned each seller is about its own impact on the market price.
D)the easier it becomes to observe members violating their agreements.

Question 14

In general,game theory is the study of

A)how people behave in strategic situations.
B)how people behave when the possible actions of other people are irrelevant.
C)oligopolistic markets.
D)all types of markets,including competitive markets,monopolistic markets,and oligopolistic markets.

Question 15

Scenario 17-1.Assume that the countries of Irun and Urun are the only two producers of crude oil.Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits.In the world market for oil,the demand curve is downward sloping.
Refer to Scenario 17-1.The fact that both countries have colluded to earn higher profit shows their desire to keep their combined level of output

A)above the monopoly level.
B)below the Nash equilibrium level.
C)equal to the Nash equilibrium level.
D)above the Nash equilibrium level.

Question 16

In an oligopoly,the total output produced in the market is

A)higher than the total output that would be produced if the market were a monopoly and higher than the total output that would be produced if the market were perfectly competitive.
B)higher than the total output that would be produced if the market were a monopoly but lower than the total output that would be produced if the market were perfectly competitive.
C)lower than the total output that would be produced if the market were a monopoly but higher than the total output that would be produced if the market were perfectly competitive.
D)lower than the total output that would be produced if the market were a monopoly and lower than the total output that would be produced if the market were perfectly competitive.

Question 17

Which of the following statements is correct?

A)When duopoly firms reach a Nash equilibrium,their combined level of output is the monopoly level of output.
B)When oligopoly firms collude,they are behaving as a cartel.
C)In an oligopoly,self-interest drives the market to the competitive outcome.
D)An oligopoly is an example of monopolistic competition.

Question 18

Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together,

A)they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
B)each firm's profit always ends up being zero.
C)society is worse off as a result.
D)Both a and c are correct.

Question 19

Table 17-9 $$\begin{array} { | r | r | r | } \hline \text { Price } & \text { Quantity } & \begin{array} { c } \text { Total } \\\text { Revenues }\end{array} \\\hline 70 & 0 & 0 \\\hline 65 & 100 & 6500 \\\hline 60 & 200 & 12000 \\\hline 55 & 300 & 16500 \\\hline 50 & 400 & 20000 \\\hline 45 & 500 & 22500 \\\hline 40 & 600 & 24000 \\\hline 35 & 700 & 24500 \\\hline 30 & 800 & 24000 \\\hline 25 & 900 & 22500 \\\hline 20 & 1000 & 20000 \\\hline 15 & 1100 & 16500 \\\hline 10 & 1200 & 12000 \\\hline 5 & 1300 & 6500 \\\hline 0 & 1400 & 0 \\\hline\end{array}$$

-Refer to Table 17-9.If Acme and Pinnacle operate to jointly maximize profits,then what quantity is sold?

A)800
B)700
C)600
D)500

Question 20

Which of these situations produces the largest profits for oligopolists?

A)The firms reach a Nash equilibrium.
B)The firms reach the monopoly outcome.
C)The firms reach the competitive outcome.
D)The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.

Question 21

In a game,a dominant strategy is

A)the best strategy for a player to follow only if other players are cooperative.
B)the best strategy for a player to follow,regardless of the strategies followed by other players.
C)a strategy that must appear in every game.
D)a strategy that leads to one player's interests dominating the interests of the other players.

Question 22

Much of the research on game theory in recent decades was driven by attempts to analyze actions of players during

A)the Great Depression of the 1930s.
B)World War II.
C)the Cold War between the United States and the Soviet Union.
D)the ascendancy of the conservative movement in the United States in the 1970s and 1980s.

Question 23

A lack of cooperation by oligopolists trying to maintain monopoly profits

A)is desirable for society as a whole.
B)is not desirable for society as a whole.
C)may or may not be desirable for society as a whole.
D)is not a concern due to antitrust laws.

Question 24

Table 17-14
Refer to Table 17-14.If player A chooses his/her best strategy,player B should

A)choose right and earn a payoff of 2.
B)choose right and earn a payoff of 3.
C)choose left and earn a payoff of 1.
D)choose left and earn a payoff of 0.

Question 25

Table 17-14
Refer to Table 17-14.Which of the following statements about this game is true?

A)Up is a dominant strategy for A and Right is a dominant strategy for B.
B)Up is a dominant strategy for A and Left is a dominant strategy for B.
C)Down is a dominant strategy for A and Right is a dominant strategy for B.
D)Down is a dominant strategy for A and Left is a dominant strategy for B.

Question 26

From society's standpoint,cooperation among oligopolists is

A)desirable,because it leads to less conflict among firms and a wider variety of products for consumers.
B)desirable,because it leads to an outcome closer to the competitive outcome than what would be observed in the absence of cooperation.
C)undesirable,because it leads to output levels that are too low and prices that are too high.
D)undesirable,because it leads to output levels that are too high and prices that are too high.

Question 27

In the game in which two oil companies own adjacent oil fields,the companies will not use the oil efficiently because

A)neither company has a dominant strategy in the game.
B)the companies collude and produce a quantity of oil that is less than the socially-efficient quantity.
C)the pool from which they recover the oil is a common resource.
D)the pool from which they recover the oil is not large enough to allow both companies to earn a positive profit.

Question 28

Which of the following is correct?
When oligopolies collude

A)they make higher profits and consumers of the product are better off.
B)they make higher profits but consumers of the product are worse off.
C)they make lower profits and consumers of the product are better off.
D)they make lower profits and consumers of the product are worse off.

Question 29

In game theory,a Nash equilibrium is

A)an outcome in which each player is doing his best given the strategies chosen by the other players.
B)an outcome in which no player wishes to change her chosen strategy given the strategies chosen by the other players.
C)the outcome that occurs when all players have a dominant strategy.
D)All of the above are correct.

Question 30

A cooperative agreement among oligopolists is less likely to be maintained,

A)the greater the number of oligopolists.
B)the larger the number of buyers of the oligopolists' product.
C)the smaller the number of buyers of the oligopolists' product.
D)the more likely it is that the game among the oligopolists will be played over and over again.

Question 31

Which of the following statements is (are)true of the prisoners' dilemma?
(i)Rational self-interest leads neither party to confess.
(ii)Cooperation between the prisoners is difficult to maintain.
(iii)Cooperation between the prisoners is individually rational.

A)(ii)only
B)(ii)and (iii)
C)(i)and (iii)
D)(i),(ii),and (iii)

Question 32

Why would lack of cooperation between criminal suspects be desirable for society as a whole?

A)The suspects are able to choose optimal outcomes for themselves by acting in their own self interest.
B)The prisoners' dilemma safeguards the criminals' constitutional rights.
C)More criminals will be convicted.
D)None of the above is correct.

Question 33

Table 17-22
Refer to Table 17-22.Which of the following statements is correct if Brian and Matt will play this game only once?

A)The Nash equilibrium is the high price.
B)A Nash equilibrium cannot be established unless Brian and Matt collude.
C)A Nash equilibrium cannot be established without the players repeating the game.
D)The Nash equilibrium price is the low price.

Question 34

The paradoxical nature of oligopoly can be demonstrated by the fact that,even though the monopoly outcome is best for the oligopolists,

A)they collude to set the output level equal to the Nash equilibrium level of output.
B)they have incentives to increase production above the monopoly outcome.
C)they do not behave as profit maximizers.
D)self-interest juxtaposes the profits earned at the Nash equilibrium.

Question 35

Table 17-22
Refer to Table 17-22.Which of the following statements is correct?

A)Matt's dominant strategy is to charge a low price.
B)Brian's dominant strategy is to charge a high price.
C)The dominant strategy for both Brian and Matt is to charge a low price.
D)Matt's dominant strategy is to charge a high price.

Question 36

A cooperative agreement among oligopolists is more likely to be maintained,

A)the greater the number of oligopolists.
B)the larger the number of buyers of the oligopolists' product.
C)the smaller the number of buyers of the oligopolists' product.
D)the more likely it is that the game among the oligopolists will be played over and over again.

Question 37

After initial success,the OPEC cartel saw the price of oil and the revenues of its members decline due,in part,to

A)the low elasticity of demand for oil in the short run.
B)the large number of buyers from each member nation.
C)surging demand for oil in the early 1980s.
D)OPEC members failing to produce their agreed-upon production levels.

Question 38

The prisoners' dilemma game

A)provides insight into why cooperation is individually rational.
B)provides insight into why cooperation is difficult.
C)is a game in which neither player has a dominant strategy.
D)is a game in which exactly one of the two players has a dominant strategy.

Question 39

Table 17-14
Refer to Table 17-14.Which outcome is the Nash equilibrium in this game?

A)Up-Right
B)Up-Left
C)Down-Right
D)Down-Left

Question 40

Games that are played more than once generally

A)lead to outcomes dominated purely by self-interest.
B)lead to outcomes that do not reflect joint rationality.
C)encourage cheating on cartel production quotas.
D)make collusive arrangements easier to enforce.

Question 41

As the number of firms in an oligopoly becomes very large,the price effect disappears.

Question 42

All examples of the prisoner's dilemma game are characterized by one and only one Nash equilibrium.

Question 43

Although the practice of predatory pricing is a common claim in antitrust suits,some economists are skeptical of this argument because they believe

A)the evidence of its practice is nearly impossible to collect.
B)predatory pricing is not a profitable business strategy.
C)even though predatory pricing is a profitable business strategy,it is on balance beneficial to society.
D)predatory pricing actually attracts new firms to the industry.

Question 44

A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Question 45

When all firms choose their best strategy given the strategies that all the other firms have chosen,the result is a Nash equilibrium.

Question 46

The primary purpose of antitrust legislation is to

A)protect small businesses.
B)protect the competitiveness of U.S.markets.
C)protect the prices of American-made products.
D)ensure firms earn only a fair profit.

Question 47

Predatory pricing refers to

A)a firm selling certain products together rather than separately.
B)a monopoly firm reducing its price in an attempt to maintain its monopoly.
C)firms colluding to set prices.
D)All of the above are examples of predatory pricing.

Question 48

For a firm,strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

Question 49

The story of the prisoners' dilemma shows why

A)predatory pricing is clearly not in society's best interest.
B)economists are unanimous in condemning resale price maintenance,since it inevitably reduces competition.
C)oligopolies can fail to act independently,even when independent decision-making is in their best interest.
D)oligopolies can fail to cooperate,even when cooperation is in their best interest.

Question 50

Any market that is served by an oligopoly is in effect served by a monopoly.

Question 51

All cartels are inherently reliant on

A)a horizontal demand curve.
B)an inelastic demand for their product.
C)the cooperation of their members.
D)enforcement of antitrust laws.

Question 52

In some games,the noncooperative equilibrium is bad for the players and bad for society.

Question 53

The practice of selling a product to retailers and requiring the retailers to charge a specific price for the product is called

A)fixed retail pricing.
B)resale price maintenance.
C)cost plus pricing.
D)unfair trade.

Question 54

A tit-for-tat strategy,in a repeated game,is one in which a player starts by cooperating and then does whatever the other player did last time.

Question 55

Economists claim that a resale price maintenance agreement is not anti-competitive because

A)suppliers are never able to exercise noncompetitive market power.
B)if a supplier has market power,it will be likely to exert that power through wholesale price rather than retail price.
C)retail markets are inherently noncompetitive.
D)retail cartel agreements cannot increase retail profits.

Question 56

In a duopoly if the firms have agreed to jointly maximize profits,then each firm can increase its current profits by producing more.

Question 57

The essence of an oligopolistic market is that there are only a few sellers.

Question 58

One way that public policy encourages cooperation among oligopolists is through antitrust law.

Question 59

A group of firms that collude is called a cartel.

Question 60

The practice of requiring someone to buy two or more items together,rather than separately,is called

A)resale maintenance.
B)product fixing.
C)tying.
D)free-riding.

Question 61

Explain the practice of tying and discuss why it is controversial.

Question 62

Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly.Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.

Question 63

Tying can be thought of as a form of price discrimination.

Question 64

Ford and General Motors are considering expanding into the Vietnamese automobile market.Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.

Question 65

Outline the purpose of antitrust laws.What do they accomplish?

Question 66

Resale price maintenance prevents retailers from competing on price.

Question 67

Policymakers should be aggressive in using their powers to place limits on firm behavior,because business practices that appear to reduce competition never have any legitimate purposes.

Question 68

Even when allowed to collude,firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel.Why?